Understanding FICO® Scoring

[thomasil74]

My current situation is like this: (Equifax FICO Credit Score) = 649 I have 4 closed credit cards with balances and using a credit counseling to make payments at lower rates. The balances are as follows: Chase 1 = 9000 @ 6.5% Chase 2 = 4000 @6.5 % US Bank = 3500 @ 7.8 % Citibank = 4500 @ 9.9 % I have 10K in savings. I am in the market for a home, and the prices are in the 150K-170K range. What should I do with the 10K in savings, use it for down payment, pay one credit card off, pay some on all 4 credit cards? My goal is for my FICO score to be the highest possible to get the lowest interest rate on the 30 yr mortgage.

[TheNewWorldMan]

What percentage of your credit limits are you using for each of those cards?

[thomasil74]

Chase 1 Balance = $9,000 @ 6.5%   Credit Line = $14,600  (62% used)

Chase 2 Balance = $4,000 @6.5 %    Credit Line = $7,000  (57% used)

US Bank Balance = $3,500 @ 7.8 %    Credit Line  = $5,700  (61% used)

Citibank Balance = $4,500 @ 9.9 %   Credit Line  = $7,190  (63% used)

Message Edited by thomasil74 on 07-10-2007 08:02 PM

Message Edited by thomasil74 on 07-10-2007 08:03 PM

Message Edited by thomasil74 on 07-10-2007 08:04 PM

[masdeocho]

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thomasil74 wrote:

Chase 1 Balance = $9,000 @ 6.5%   Credit Line = $14,600  (62% used)

Chase 2 Balance = $4,000 @6.5 %    Credit Line = $7,000  (57% used)

US Bank Balance = $3,500 @ 7.8 %    Credit Line  = $5,700  (61% used)

Citibank Balance = $4,500 @ 9.9 %   Credit Line  = $7,190  (63% used)

Message Edited by thomasil74 on 07-10-2007 08:02 PM

Message Edited by thomasil74 on 07-10-2007 08:03 PM

Message Edited by thomasil74 on 07-10-2007 08:04 PM

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There are infinite possibilities here.  If you are solely concerned about FICO, you want to decrease util across the board and in total.  One permutation reduces your util to 31%:

Pay $4000 to Chase 1, balance = $5,000, util = 34%

Pay $2000 to Chase 2, balance = $2,000, util = 28%

Pay $1500 to USB, balance = $2,000, util = 35%

Pay $2500 to Citibank, balance = $2,000, util = 27%.

If, instead, you are interested in paying the least amount of debt (*sticks fingers in ears to avoid hearing the repeat of the heated snowball argument*), then pay the most to Citibank because it has the highest interest rate.

If you use all 10k to pay down debt, you will need to save up for the house purchase (down payment, closing costs, moving expenses, utility deposits, etc.)

Good luck!

[barderspond]

That's a lot of CC debt to have hanging over your head once you get into a house, but as was stated before, there are a lot of things to consider here.

What's the payment on a $170K mortgage at 6.5%?  Roughly $1075, then you'll need to add about $40 for PMI.  That puts you over $1100/month before taxes and insurance are added (this varies wildly by state, could be 50-100 or several hundred more).

Now...is that the same or less than what you're paying for rent right now?

If so, then it makes sense for you either way.  If not, then how close is it?  If it's a significant jump, I'd be very wary unless you can be sure you can handle all those payments.

I wouldn't want to enter a new home with zero equity, so my preferrance is to use all that money for downpayment...but if you live in a housing market that is moving upward fast, you might be better off to pay down the credit card debt and let the market grow your equity for you.  Additionally, that 10K only makes about $60/month difference in the payment.

Would you be disciplined enough to use that extra $60/month to pay down your credit cards?  If so, it might make sense to use the money for downpayment.  And what are the minimum monthly payments on these cards?

If you're savvy with spreadsheets, setup an excel sheet and list out all four cards and a new (hypothetical) loan balance and plot it out for several years.  See what happens when you change from a larger downpayment to paying off CC debts and so forth.  Let the numbers speak to you and tell you what to do...

And I'm actually all for the other suggestion of (IF you decide to use the money for paying off CCs rather than downpayment) paying off entire balances first.  Get rid of one or two monthly payments makes it easier for you to keep track of (therefore helping ensure you don't forget or miss a payment somehwere), and also frees up a "minimum" payment that you may apply elsewhere.

You could get rid of Chase2 and Citibank and free up about $150/month that you could use to pay down US Bank.  You'd have three cards paid off completely in less than two years, and then you could apply that $200 (or more) towards the first Chase card.   A little over four years and all you have left is a mortgage.  (And think if you applied that extra $400/month to the mortgage at that point...you'd be in debt-free heaven in no time).

Sorry for the long post....but there really is no one simple answer to this.  Good luck!

[FICOnater2007]

If it were me, I'd knock out these two:

     US Bank Balance = $3,500 @ 7.8 %

     Citibank Balance = $4,500 @ 9.9 %

They have the highest interest rates and you'll be paying for this "$8000.00" than you will on the other two balances. Then I'd close those two accounts and leave the other two open.  Take the $2000 (out of your $10K) and stick that in the bank. When you apply for credit they will ask about checking / savings accounts and balances anyway. 

You could use the $2K to help with a downpayment or for additional expenses after you get a home.  Have you looked into any zero down homes or new homeowner programs?

Good luck,

FICOnater2007

[flyers]

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FICOnater2007 wrote:

If it were me, I'd knock out these two:

     US Bank Balance = $3,500 @ 7.8 %

     Citibank Balance = $4,500 @ 9.9 %

They have the highest interest rates and you'll be paying for this "$8000.00" than you will on the other two balances. Then I'd close those two accounts and leave the other two open.  Take the $2000 (out of your $10K) and stick that in the bank. When you apply for credit they will ask about checking / savings accounts and balances anyway. 

You could use the $2K to help with a downpayment or for additional expenses after you get a home.  Have you looked into any zero down homes or new homeowner programs?

Good luck,

FICOnater2007

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I would not recommend closing any of your CC accounts that you pay off.  You'll most likely get dinged for lowering your overall utilization with any accounts closed.

[FICOnater2007]

Flyers is right, let me rephrase..."pay them off and CUT THEM UP!"  True, don't close the accounts on those cards, but definately stop charging stuff on them.

Confucius say, if you find yourself in a hole -- stop digging. 

Those interest rates are eating you up, so I'd pay them off ASAP.  For one it will save you a ton of $$$ in the long run.  Plus the % of available credit will appear higher on your CR.

FICOnater2007